Political Conflict and Economic Competition

Sammanfattning: A key ingredient for a dynamic economy is a modicum of competition, but with weak institutions powerful elites have strong incentives to collude to generate economic rents. Weak institutions also increase the scope for political violence, as an array of powerful elites have incentives to use coercion for private gains. This paper explores the link between political conflict and the economy's competitiveness by developing a framework where elites use coercive means to bargain over economic rents that arise through market manipulation. In the absence of a conflict, incumbents create restrictive markets to maximize their rents. A moderate but credible coercive threat against the regime forces incumbents to allow a greater mass of participants in the economy, thus making it more competitive. Economic competitiveness reflects the equilibrium of the underlying intra-elite conflict and shocks to the balance of power alter the competitiveness of the economy. Testing the framework explanatory power on England's historical development, the paper challenges the popular argument that political and economic development in early modern English development was driven by a rising middle class. Instead, economic and political policy over a six century period follows the changing dynamics of a continuous intra-elite conflict.